The introduction of corporate rescue provisions along the lines of the United States' Chapter 11 in Hong Kong next year will require directors to make fine judgments about the prospects of survival of financially distressed companies.

That is the view of Patrick Yeung, the chief executive and executive chairman of Hong Kong-listed Asian Capital Holdings, a provider of corporate finance advisory services.

'It is a long-awaited bill, but there are also some uncertainties in some areas which need to be clarified before it turns into law,' Yeung said.

Among the challenges facing directors if the new law is passed is deciding whether they should continue to let a company continue operating or if they should start a corporate rescue process.

'For example, if a company has run out of cash, it would seem that it should go into a corporate rescue process. But if directors know a customer will be paying a bill next week, while a supplier will be willing to wait for another month before the company pays, it seems it is then just a cash-flow issue and the directors should keep the company going,' Yeung said.

The government may need to give some guidelines to directors on how to avoid the risk of allowing an insolvent company to continue trading. If directors were concerned about such a danger, they might apply for a Chapter 11-style rescue earlier than they need to, he said.

Yeung said a flaw in the current proposals was that directors could appoint a provisional supervisor under a Chapter-11 style rescue, but the qualifications required for such a supervisor were broad and the experience requirements were unclear.

'This may lead to a problem in that the directors may appoint friendly parties instead of truly experienced professionals to act as a provisional supervisor. This may not be in the best interest of the creditors, employers and shareholders of the company,' he said.

The government proposes to introduce the US Chapter 11-style corporate rescue bill by the middle of next year. It will be the third attempt in a decade to push the bill through. The bill aims to give troubled companies six months' breathing space to restructure or find a buyer. During the grace period, the company cannot be wound up by creditors.

Hong Kong currently has no bankruptcy protection, so companies can be wound up by a single creditor.

The government failed to pass the ordinance in 2001 and 2003. In the first try, the law would have required that employees receive all unpaid salary before a corporate rescue could begin, but liquidation professionals said companies that could comply with this were not in trouble. The second attempt tried to cap staff payments, but employees opposed it.

The latest proposal now envisages that a company in a corporate rescue can begin the rescue process and then repay workers in phases.